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Tenaris S.A. Q3 2022 Financial Summary

Business Context and Reporting Period

Tenaris S.A., a global manufacturer of tubular products for the oil and gas industry, reported unaudited consolidated results for the quarter ended September 30, 2022. The filing includes a press release detailing performance against the prior quarter (Q2 2022) and the same period in the prior year (Q3 2021). The company operates primarily in the Tubes segment (seamless and welded pipes) and an Others segment.

Key Financial Metrics

Capital Expenditures: $129 million for the quarter, including $56 million for a wind farm in Argentina.
Dividend: Interim dividend of $0.17 per share ($0.34 per ADS), totaling approximately $201 million.

Material Changes vs. Prior Periods

• Revenue Growth: Net sales increased 6% sequentially and 70% year-over-year. The sequential increase was driven by a 12% rise in average selling prices, which offset a 4% decline in shipment volumes due to lower pipeline deliveries and seasonal factors.
• Profitability: Operating income rose 21% sequentially and 248% year-over-year. EBITDA margin expanded to 31.8%, exceeding 30% for the first time, as pricing gains outpaced increases in raw material and energy costs.
• Net Income Decline: Despite strong operating results, net income fell 4% sequentially. This was primarily due to non-operating items: a significant drop in equity earnings from non-consolidated companies (Ternium and Usiminas) and higher financial expenses.
• Working Capital: Operating cash flow was reduced by a $601 million increase in working capital, driven by inventory buildups in anticipation of higher shipments and increased receivables.

Outlook, Risks, and Unusual Items

Guidance and Outlook: Management anticipates further sales growth in Q4 2022, boosted by higher pipeline project shipments and additional pricing gains. EBITDA margins are expected to benefit from operating leverage, and free cash flow is projected to recover.

US Trade Case: The U.S. International Trade Commission (ITC) issued a final determination on October 26, 2022, finding injury to the U.S. OCTG industry. Tenaris is required to pay antidumping duties of 78.30% on imports from Argentina and 44.93% on imports from Mexico for five years. The company has been paying these duties since May 11, 2022, and has reflected them in production costs.

Unusual Items and Risks:

• Argentina FX Impact: A $30 million loss was recorded in Q3 due to a dividend distribution in kind (Argentine sovereign bonds) by an Argentine subsidiary, impacted by valuation changes between local and international markets.
• Impairments: A $32 million impairment loss was recognized on investments in Usiminas (direct and indirect via Ternium). Additionally, a $15 million impairment was recorded on a joint venture in Russia.
• Macro Risks: The company cites high geopolitical risk, slowing global economic growth, and volatility in energy prices as key risks, though energy security concerns continue to support investment levels.

Investor Verification Checklist

• Verify the impact of the new U.S. antidumping duties (78.30% for Argentina, 44.93% for Mexico) on future margins and pricing strategies.
• Monitor the trajectory of working capital, specifically inventory levels, to ensure the buildup aligns with actual shipment demand.
• Assess the volatility of equity earnings from non-consolidated companies (Ternium and Usiminas), which significantly impacted net income despite strong core operations.
• Review the exposure to Argentine foreign exchange controls and the valuation of assets/bonds held in Argentina.
• Confirm the execution of the $56 million wind farm investment in Argentina and its long-term strategic fit.